Ukraine - Heat Supply and Energy Efficiency Project

Report No. PID4374 Project Name Ukraine-Kiev District Heating Improvement(+) Project Region Europe and Central Asia Sector Energy Project ID UAPA44832 Borrower Republic of Ukraine Implementing Agencies Kievenergo 252001, Kiev, I. Franko sq., 5, Ukraine Contact Person: Mr. Ivan Plachkov, Board Chairman Telephone No.: (044) 293 62 61 Facsimile No.: (044) 224 14 61 Kiev Municipal District Heating Company 252057, Kiev, 0. Dovzhenko Street, 2, Ukraine Contact Person: Mr. Matvienko, General Manager Telephone No.: (044) 446 82 62 Date This PID Prepared April 14, 1998 Appraisal Date March 14, 1997 Projected Board Date May 21, 1998 Sector Background 1. District heating (DH) systems provide the majority of heat and hot water supply in Ukraine's urban areas as well as steam for industry. These systems utilize primarily gas and some mazut, which during the period of the Soviet regime were provided primarily from Russia at very low prices and at virtually unlimited supply. As the cost of these fuels have increased over the past four years while incomes have not kept pace, this has created a situation where the DH service has become difficult to afford and service levels have had to be reduced. In addition, many of the DH systems are in excess of 40 years old and have not been subject to the normal process of upgrading and modernization which takes place in Western systems. 2. The largest DH system in Ukraine is in Kiev city, with a population of 2.8 million roughly estimated to be growing at 1% per year. The Kiev DH system can be characterized by a deficit of heat production capacity, old and outdated heat production facilities, inadequate water treatment capacity, high heat and water losses in the networks due largely to pipelines which have reached the end of their useful life, lack of control and regulation equipment and heat meters both in heat production plants and substations, and a general inability to carry out major repairs, replace outdated equipment and initiate new construction activities due primarily to a lack of funds. As a result, energy wastage in the DH system is high and the quality of service has been poor. The two Kiev DH enterprises, Kievenergo and Kiev Municipal DH Company, are experiencing difficulties due to the high level of unpaid bills from consumers. Investments are urgently needed to improve the efficiency of the DH system, reduce losses and provide an improved service.  Objectives 3. Against this background, the objectives of the proposed project would be to: (a) replace and increase heat production capacity to better meet existing and expected future demand and to improve the reliability and service levels in the Kiev DH system; (b) extend the life of, increase the efficiency of and enhance conservation of the Kiev DH system, through rehabilitation and introduction of improved technologies and materials; and (c) promote sound cost recovery policies and practices and the commercialization and institutional strengthening of project DH companies, to identify the most efficient corporate and institutional structure for provision of DH in Kiev and ways to facilitate the eventual privatization of the service, and to support project implementation. Description 4. The proposed project would consist of the following components: (a) heat production capacity improvement component, including rehabilitation (500 Gcal/h) and replacement of old boilers (860 Gcal/h) and construction of new boilers (720 Gcal/h) in the main DH, to alleviate the current deficit of heat production capacity and to better meet the existing and growing demand; (b) DH rehabilitation component, including a substantial program of transmission (80 km) and distribution (15 km) pipeline and network improvements in the main DH system, water treatment and substation (1,500) improvements, including heat meters (1,500) and construction of a stack in the city center, to address the deteriorating technical conditions and outmoded technology, and rehabilitation of an electric substation (2 x 40 MVA) and power cables in the city center to provide adequate electric supply for boiler houses and DH pumping equipment; and (c) institutional support component for project agencies, including consultancy and advisory services, training, equipment and software for project management and implementation, and for review of appropriate institutional and corporate structures for DH enterprises, including support for implementation of recommendations. 5. EBRD has expressed interest in co-financing the project with the World Bank. The amount of the loans are $ 200 million for the Kievenergo investment program, to be provided by the World Bank, and $ 40 million for the Kiev Municipal DH Company investment program, to be provided by EBRD. The loans would finance about 80t of total project cost (net), as project agencies have limited capability to contribute to the capital cost of the project. Donor support is being sought for part of the implementation support and the institutional support component of the project. Implementation 6. Implementation of the project would be the responsibility of Kievenergo -2 -  and Kiev Municipal DH Company for their respective parts of the project. Performance indicators for each project objective were defined during project appraisal. Supervision requirements were identified during project appraisal. Sustainability 7. The institutional and financial sustainability of the project would be analyzed and supported through: measures to improve the financial performance of DH companies, capacity building of project agencies to evaluate technical options and prioritize investments based on economic considerations, and other measures to be identified for inclusion under the institutional support program for project agencies. Lessons Learned from Past Operations in the Country/Sector 8. The proposed project would represent the first DH investment loan to Ukraine. The key lesson learned from the Ukraine Hydropower and Systems Control Project approved by the Bank's Board is that strong commitment of both the implementing agencies and the sector ministries is crucial to ensuring approval by the Government and upfront improvement of collections is necessary to ensure timely availability of counterpart funds. 9. Lessons learned from other Bank-financed DH projects under implementation in Poland, Estonia and Latvia include the findings that: (a) strong project ownership and advanced preparation of project components is necessary for timely implementation, (b) decentralized project management arrangements work far better than centralized arrangements, (c) the relationship between prices and incomes changes rapidly in countries in transition and the heating service which appears largely unaffordable will become easier to afford in a relatively short period of time, (d) end-user efficiency improvements, which initially appear difficult to support due to building ownership and affordability reasons, may be possible to support on a pilot level, and (e) there is the possibility to redress the financial difficulties of DH companies during project preparation through tariff increases and settlement of arrears by major debtors, including households. 10. These lessons were considered during the preparation period of the proposed project. The project represents an important case study for an ongoing ESMAP-sponsored study on DH systems which is examining industry structure, alternatives to DH and the conditions under which building efficiency improvements can best be supported. Poverty Category 11. Not applicable. 12. Implementation of the project is anticipated to have positive environmental benefits through improved efficiency in the use of fuels, by contributing to a reduced level of air pollution in Kiev and by reducing the wastage of water used in the DH system. The project has been placed in environmental screening category "B," under which an environmental review and - 3 -  mitigation plan has been prepared. See Environmental Analysis Annex for details. Program Objective Category 13. The project is classified under the category of EN/GX - environmentally sustainable development/other energy (100%). Contact Point: Carolyn Gochenour, ECSEG The World Bank 1818 H Street, N.W. Washington, D.C. 20433 (202) 473-9681 (tel) (202) 477-8518 (fax) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 14, 1998. - 4 -  Annex The DH rehabilitation/construction components would focus on improving energy efficiency; environmental issues are principally restricted to the selection of materials for pipeline insulation and the disposal of waste, possibly asbestos. The heat production plant currently support the use of natural gas. Further investments would focus on improvements to increase fuel use efficiency, reduce water losses in networks and rehabilitate the water treatment system. An environmental review has been carried out for the project and includes an environmental mitigation plan. The DH rehabilitation/construction components focus directly on the improvement in the use of energy, reduction of wastage of fresh water in DH systems, and improvements in water treatment. The potential impacts from these projects are generally positive; potential adverse impacts would be highly localized and could be effectively addressed through the environmental mitigation plan. - 5 -